Personal Finance: A job for now, an income for life

Easy though it is not to worry about financing our retirement, younger pensioners must now address the future.

GETTING EXCITED about annuities might seem like the ultimate contradiction in terms in personal finance circles, but next to seeing grandma's house sold to pay for care in a residential home, it is the prospect of having to exchange a personal pension policy for a small annual pension which stops when the owner dies, leaving nothing for the descendants, which stirs up most readers in the world of personal finance.

The Government is under pressure to provide retiring policy-holders with a better deal, not least to encourage the next generation to make a start with a penion plan as soon as possible, but Gordon Brown is notoriously tight with taxpayers' money, and any help is likely to come from the private sector. This month Norwich Union has launched a with-profits annuity which varies the pension according to the future performance of the stock market, and Merchant Investors is launching a unit-linked annuity which links annual payments to the underlying performance of the units in which the fund is invested.

The Norwich Union is not the first company to offer a with-profits annuity: Scottish Widows, for example, was there before them. The annual pension payment or annuity is based on the income from a mix of shares, fixed interest stocks, property and cash deposits, and benefits from the same kind of annual bonuses which are credited to standard endowment and with- profits policies.

It also allows the Norwich to offer two unique features; a guaranteed minimum annuity which provides a known floor, below which the annual payment will not fall even when the stock market is going through a bad patch. A surviving spouse can also elect to switch to a conventional annuity in order to provide a completely guaranteed annual income when the the first one has died. Merchant Investors is a more speculative deal which fluctuates with the value of units in the fund.

In both cases, the income over the long term should be greater than the yield on medium-to-long-dated government stocks, which is what determines conventional annuity rates. But it will inevitably start lower because of the low current yield on shares, and it will inevitably fluctuate with the performance of the share markets in future. They do also involve an annual management charge.

They are therefore more suitable for younger pensioners - especially those below the state retirement age who have already retired. In most cases they are by definition quite comfortably off and can afford to wait for long-term out-performance, and they probably still have some supplementary earning power.

New thinking from the private sector on annuities is both welcome and timely. Under current rules, the Government allows the policy-holder to take a quarter of the accumulated fund tax-free to do what he or she wants with, but the rest has to be used to buy an annual income for life.

If pensioners looked at an annuity as an insurance policy which guarantees them an income for life, it might stand a sporting chance of acceptance - if not exactly popularity. But the majority of pensioners see it as a one-way bet in which they first lose 75 per cent of their capital and, sooner or later, the income too.

They ignore the fact that money already invested in a pension fund has been growing steadily, and concentrate on the fact that the percentage pay-out on funds converted into a fixed-rate annuity has virtually halved over the past decade - to just under 9 per cent for a man of 65, and approximately 7 per cent for a woman of 60. Once bought, there is no return of capital and no increase in the annual payment.

Indexed linked annuities grow usually either in line with the retail price index or by 5 per cent, whichever is the less, but they start at around 60-65 per cent of a fixed annuity and take 13 years to catch up. In a perfect world, pensioners would like to get their hands on the capital in their fund to use as they see fit, but no government is going to risk pensioners spending the lot and then relying on the state support.

The best pensioners who want to keep their capital and still draw an income in retirement can do is opt for an income draw-down plan, which allows them to invest the capital from a pension plan and draw an income.

But the income cannot be greater than an annuity would pay, and at 75 it is compulsory to buy an annuity anyway. Income draw-down plans are also expensive to set up and nor are they considered cost-effective for sums under pounds 100,000.

What the public really needs is a CAT-marked draw-down option which requires the pension fund to be invested in a cheaply-managed, not too risky fund, from which the pensioner can draw the income while retaining the capital.

Start your day with The Independent, sign up for daily news emails
The Queen and the letter sent to Charlie
Arts and Entertainment
Eurovision Song Contest 2015
EurovisionGoogle marks the 2015 show
Two lesbians hold hands at a gay pride parade.
peopleIrish journalist shares moving story on day of referendum
Arts and Entertainment
<b>Kathryn Williams</b>
When I was supporting Ray La Montagne I was six months pregnant. He had been touring for a year and he was exhausted and full of the cold. I was feeling motherly, so I would leave presents for him and his band: Tunnock's Tea Cakes, cold remedies and proper tea. Ray seemed painfully shy. He hardly spoke, hardly looked at you in the face. I felt like a dick speaking to him, but said "hi" every day. </p>
He was being courted by the same record company who had signed me and subsequently let me go, and I wanted him to know that there were people around who didn't want anything from him. At the Shepherds Bush Empire in London, on the last night of the tour, Ray stopped in his set to thank me for doing the support. He said I was a really good songwriter and people should buy my stuff. I was taken aback and felt emotionally overwhelmed. Later that year, just before I had my boy Louis, I was l asleep in bed with Radio 4 on when Louis moved around in my belly and woke me up. Ray was doing a session on the World Service. </p>
I really believe that Louis recognised the music from the tour, and when I gave birth to him at home I played Ray's record as something that he would recognise to come into the world with. </p>
booksKathryn Williams explores the works and influences of Sylvia Plath
Liz Kendall played a key role in the introduction of the smoking ban
newsLiz Kendall: profile
Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?